Small Business Sentiment: “Optimism Ticks Up Slightly”

The latest issue of the NFIB Small Business Economic Trends is out today (see report). The November update for October came in at 93.1. Despite the small improvement, the indicator remains in a range seen at the beginning of the last recession.

Here is the opening summary of the report:

The NFIB Small Business Optimism Index rose 0.3 in October to 93.1; the slight uptick in the reading did not seem to indicate a dramatic shift in owner sentiment over the course of the month. The survey, conducted before the presidential election, found that the percent of owners uncertain about whether business conditions will be better or worse in six months, was at a record high of 23%. This eclipsed the pre-recession record of 15% reached during the Carter Administration. NFIB's forward labor market indicators weakened last month, and owner views of the future do not foresee much improvement in economic growth.

"While four of ten survey components rose, the Index still remains in solidly pessimistic—and recessionary territory," said NFIB chief economist William Dunkelberg.

The first chart below highlights the 1986 baseline level of 100 and includes some labels to help us visualize that dramatic change in small-business sentiment that accompanied the Great Financial Crisis. Compare, for example the relative resilience of the index during the 2000-2003 collapse of the Tech Bubble with the far weaker readings of the past three years. The NBER declared June 2009 as the official end of the last recession.

The average monthly change in this indicator is 1.28 points. To smooth out the noise of volatility, here is a 3-month moving average of the Optimism Index along with the monthly values, shown as dots.

Inventories and Sales

The findings on small business sales and sales expectations continue to highlight a fundamental source of distress.

The net percent of all owners (seasonally adjusted) reporting higher nominal sales over the past 3 months was negative 15 percent, 2 points worse than in September, confirming the weak growth in non-durable consumer spending in the third quarter. Twenty-two (22) percent still cite weak sales as their top business problem, historically high, but down from the record 34 percent reading last reached in March 2010.

Labor Markets

The feedback on labor markets was one of the most disturbing aspects in the September report, prompting the Hiring Plans Plunge headline in the previous NFIB press release. The October report shows the labor market weakness to be stabilizing.

Owners slowed the reduction of workers in the October survey, raising the average change in employment per firm to 0.02 workers, up from a seasonally adjusted -0.23 in September. The improvement ended a run of 4 months of employment reductions. Seasonally adjusted, 11 percent of the owners reported adding an average of 2.7 workers per firm over the past few months, and 10 percent reduced employment an average of 2.9 workers. The remaining 79 percent of owners made no net change in employment. The percent of owners reporting hard to fill job openings fell 1 point to 16 percent of all owners, the second monthly decline in a row. Job creation plans remained weak, with a net 4 percent planning to increase employment, unchanged from September and 6 points below the August reading.

NFIB Commentary

This month's "Commentary" section features offers a most-mortem on last week's election:

Investors who had bet on a change expressed their discontent with a major sell-off in the stock market. This of course creates buying opportunities for those who were hoping for no change and got it. There will be many autopsies of the now deceased election results, and many explanations of the outcome. For small business owners, all the uncertainties remain although the odds of resolving them in one direction or another will have changed for many. But overall, it is now unlikely that anything will happen in November to make them more optimistic about the future, as has been the case for many months, even years now. Let's see what the New Year and the new Congress brings, as it is likely that current Congress will simply "kick the can" at least until January. One thing for sure, the economic pressure to do something will be large indeed. The November survey will reveal a combination of the effects of the election and hurricane Sandy. Regional differences in the performance measures should be large. Stay tuned.

Business Optimism and Consumer Confidence

The next chart is an overlay of the Business Optimism Index and the Conference Board Consumer Confidence Index. The consumer measure is the more volatile of the two, so I've plotted it on a separate axis to give a better comparison of the volatility from the common baseline of 100.

With the latest NFIB data, we see that the mood of small businesses continues to reflect the mood of the consumer at large.